Why Does Everyone Underestimate Netflix?

from the innovator's-paradox dept

Following the news that Blockbuster was about to declare bankruptcy, we had a nice discussion here about all the big companies that were supposed to kill Netflix, but didn't. With a bit of a spin on that idea, James Ledbetter, over at Slate, recently wondered why so many analysts and commentators have underestimated Netflix over the years, repeatedly predicting the company's demise, such as each time one of the bigger companies threatened Netflix. Ledbetter makes an interesting suggestion midway through the article:

What is it about Netflix that causes critics to misread it so badly? Call it the innovator's paradox: Netflix forged an identity by building a simple business--DVD delivery by mail--that had never been done before. The very fact that this DVD-by-mail idea connected so deeply with consumers led many observers to think that was all that Netflix could or would ever do. Instead, the DVD delivery service--while still vital to Netflix's revenue--looks more like the Trojan horse of a much wider strategy designed to change how Americans watch filmed entertainment.

I think this actually brings up (yet again), a wider point that we've been making here repeatedly, of late. It's the explanation of why it's really just not that easy to simply go and copy an innovator. What happens is that you get that cargo cult copying of just the superficial elements. Netflix's success wasn't just because it shipped people DVDs, but because it actually had a much better understanding of how consumers wanted to watch movies. The copycats just copied the basic "DVD-by-mail" aspect, and while they each tried to add their own twist, playing up their own strengths, none were able to establish that same sort of connection with customers that Netflix was able to.

This doesn't mean, of course, that Netflix will continue to dominate. I agree that it still has a number of long-term challenges, and needs to continue to outperform the many competitors who are willing to keep trying. But, to date, Netflix appears to have done a much better job really, deeply understanding how to improve the movie rental experience in a way that others in the space (and some observers and commenters) just didn't grasp.

They GET service

There were times that I was slightly confused because of a billing or shipping issue. Even something that they hadn't done wrong. They automatically just drop you an extra dvd in the mail. They are excessively pleasant, they never argue with you, they always just fix as best they can, and they give you an extra dvd.
In my 35 years as a consumer, when I think of the best customer experiences I've encountered, Netflix is at the very top of the list. Period.

Netflix not the only one underestimated

You might recall that Amazon was also underestimated by analysts and commentators, well after it was public. Then, as it is now, these prophets were wrong ;) I think it's best to see how a company is performing and how they relate to their customers, rather than to listen to pundits about the likelihood of long term success. The pundits are very rarely right.

I am notoriously bad at being a loyal customer, yet Netflix keeps on giving me ways to love it. It gives me what I want before I even know I want it and is one of the few things I will not give up. The value provided to me is simply far too great. The only thing I wish they could do is give me some freakin ability to watch natively in Linux. That is the ONLY drawback I have with them

While Netflix has spawned a number of imitators worldwide, it is of course the content owners who are the biggest blocks to even further innovation.

A postal Netflix-style system hasn't really taken off where I currently live in Spain for one very simple reason - the postal system really, really sucks. It's not uncommon for me to receive bills one or two *weeks* past the due date - unacceptable service for something like Netflix, where the value you get depends on a fast turnaround.

The answer to this *should* be streaming. A new company could make a killing locally, or Netflix could quite easily off streaming-only services to those outside the US. The problem with offering either of these? Regional licencing. Supposedly Netflix are working on offering such a service in an unnamed European country (presumably the UK to begin with) but licencing is holding them up.

So, I'm left with the options of buying DVDs locally (very expensive here, with few legal outlets in my area and limited selections), buying from overseas (slow, and sometimes the discs don't arrive at all) or P2P ...and guess which country's sales content providers are complaining about right now. Yeah.

Amazing diversification

Netflix is nothing short of amazing if for no other reason than their relentless pursuit of being on every device and platform with their streaming service. Consider the platforms they currently serve (just off the top of my head):

That is incredible. Who else can boast such a reach across platforms? Not even Adobe's Flash has such a reach.

Netflix's high-level platform-agnostic goal (change the way the bulk of the media market receives and watch professional video content) powers them forward.

And on that broadest-possible goal, they have a LONG way to go. But they're on their way. Blockbuster never had that goal. TiVo doesn't have that goal. Boxee's goal is tied to technology, not consumers (it's the Linux of Internet video viewing). Even Apple, with the iTunes Store, is focused on selling more devices (though if feels like that strategy is drifting lately).

All the best wishes to Netflix. The TV and movie middle-men deserve what's coming to them.

Amusing interview

I recall a interview where someone asked the Netflix chap something like

"Did you always know you'd go into movies via the internet or was it something that came along after you started with the postal service".

I think the answer was along the lines of

"We didn't call the company Postflix".

I used Netflix in the US and it rocked.
Here in the UK I started on Amazon that became Lovefilm.
I have flirted with hating LoveFilm's guts but on balance have decided they are improving so I'll give them a chance.

A pal of mine was switched from Amazon to Lovefilm and was rather taken aback when his first DVD arrived.
All LoveFilm movies have a code that is a few letters and a load of numbers.
He had ordered "Analyse This" and when it arrived it was in an envelope saying "LoveFilm" in large letters and a discreet code that said ANAL3485934 or something like that.

I was a doubter, but now I'm saved

When I first heard about Netflix and their DVD-by-mail service, I thought "Meh. Not for me." Usually when I want to watch a movie, I have to be in the mood for it, and I want to watch it NOW rather than in a few days, so I didn't mind the drive to Blockbuster or Movie Gallery or the convenience store down the road.

Then my wife signed up for a free trial, and I found myself browsing the site a lot and watching movies with her. The streaming was OK, but I have never particularly enjoyed watching movies on my computer so I didn't do it much. Eventually, though, my wife got hooked watching "24" on her computer and said "I wish we could watch these in the living room." After considering building an HTPC, I instead got her a Western Digital FreeAgent Theater+ so we could stream Netflix to the big TV.

Now we can hardly get the TV away from the kids - the teenager has discover 80s action movies, and the 4-year old has discovered animated movies and her favorite PBS shows. But is sure is nice to be able to watch a movie now without running to the brick-and-mortar!

Re: Amusing interview

Long-Term Challenges

I agree with the positive comments about Netflix. They're great. But as Mike suggested, they do face a significant long-term challenge as they move from rent-by-mail to streaming.

The barriers to entry for a rent-by-mail are pretty big. You have to build all those regional distribution centers. The barriers to streaming are relatively low. For less than $10 million you can have a technical offering that's just as good (technically) as Netflix's and supports virtually all the same platforms. That's not a big competitive barrier for a company with a $6B market cap. The main differentiator would be catalog, which you have to license for streaming. So, Netflix is pretty much at the mercy of a few major studios for it's streaming catalog. If the studios ever decided they wanted a competitor to surpass Netflix, they could probably almost anoint one by making sure that competitor had more desirable streaming content. As DVDs become less important, that exposure will grow.

So, Netflix is moving from a market position where they have a huge competitive barrier and they can just buy DVDs for their catalog to one where there are much lower barriers and they have to license content. I'm not saying they won't pull it off (my guess is they will), but it's far from a chip shot and I think the analysts following Netflix have a reasonable concern.

simply not as easy as it looks

There are dozens of similar business stories. In the MCAD industry SolidWorks did very well by offering "80% of the functionality of Pro/E for 50% of the price".

A couple of start ups tried to do even more of the same, something twice as good as SolidWorks 98, for 1/2 the price. But it took 5 years to work out all the various software issues, and by then SolidWorks 2003 was twice as good as SW98.

Offering something that is better or cheaper than what Netflix has today will not be enough to move much of that customer base. You need to have a better alternative to what Netflix will be 2+ years from now.
But do you even know what that will look like?

A few months ago, streaming passed by shipped

Netflix delivers more my streaming than snail-mail. I've stopped buying series to catch up on, and stream them instead. I'm looking forward to more and more movies available. And my Sanyo (that died from lightning) and Vizio blu players stream just fine. This on-demand availability is the real game changer. And I can do it on vacation too, with my laptop.

Mostly because....

We've been using Netflix since its inception. They've always offered superior service at a very fair price. We've always used their max plan allowing us to have 4 dvds at a time. Once, we lost a DVD. It was our fault. I called them up and told them the same. They sent me a duplicate DVD and didn't charge me a dime. Alas, we're moving down to the $9.99 plan after so many years. We're streaming most of our movies from them. Sorry Netflix, but to offer streaming movies as an unheard of low price, wow. Thanks, Netflix! We wish you many years of success.

Netflix

Netflix is such a great idea if only Blockbuster had the mind power to think of it first. Eventually if the USPS has to cut delivery days this could hurt Netflix a bit though I expect more people to move towards the streaming service

Sigh

Customer service and integrity

I think these are the biggest reasons for Netflix' continued success.

I tried jumping ship to Blockbuster Online for about three months when they were offering the unlimited in-store trade option. In three months, they changed the terms of my plan three times. The one time I got a scratched disc, it took a full week to get the replacement, and they did not send another movie with it. Also, I was living alone at the time in my grandmother's basement while my wife lived out of state, repairing a house that the tenants had trashed. In short, I watched a LOT of movies. Blockbuster apparently decided it was too many, because a two-day delay mysteriously appeared between them receiving a movie and shipping the new one. Last, I had an issue where the system kept skipping over the first movie in my queue because it was not available at the closest shipping center. I called the customer service and said I was willing to wait the extra day or two to get it, and that I put the movie at the top of my queue for a reason. Their response? "Sorry, there's nothing we can do." I ended up deleting everything else in my queue in order to force it to ship. Then, instead of rebuilding my queue, I canceled and went back to Netflix.

Now let's compare to Netflix for a moment. Scratched disc? Report it online and they will send the replacement along with the next movie in your queue. Movie not available nearby? They'll send the second movie in your queue for you to watch while you're waiting for the first movie to arrive. Yes, they just send you an extra disc on top of your normal x-at-a-time plan. The terms of my plan have never changed, except that the instant watch library keeps growing daily.

Re: Sigh

I really do not have any issues with DRM on a streamed service. When I am 'buying' a DVD, CD, or Digital Download (song, movie, game, etc) I despise DRM but I have yet to run into a situation that the DRM used by Netflix in conjunction with streaming that has impacted me at all.

Other than hating DRM for being DRM, is your lack of love due to something their service with DRM cannot achieve or is it a love-lost due to principle?

Re: Long-Term Challenges

"If the studios ever decided they wanted a competitor to surpass Netflix, they could probably almost anoint one by making sure that competitor had more desirable streaming content."

If the studios ever decided they wanted a competitor to surpass Netflix, it would be because that competitor was more restrictive and bowed to studio demands. In that case, a larger library is no guarantee, as the customer experience would be inferior.

You can prove that now. iTunes has a much larger library of streaming content than Netflix, but more people get their video entertainment from Netflix.

Re: Re: Re: Sigh

Due directly to Netflix choice of DRM or to the lack of a compatible player?

I am a Linux user, Windows user, Xbox 360 user, Android user, and a Wii user. I suppose it has 'impacted' me but not too much since I have never attempted to watch netflix on an unsupported platform. I do have the desire to watch Netflix on my Droid but I am not upset that it is not possible to do that today and I really have not thought of it as a DRM issue but perhaps it is. It still does not affect my

Re: Re: Re: Sigh

I respect that.
I found it unfortunate to the potential audience that you pulled back from allowing your film to be streamed via Netflix due to the DRM.
To me, the Netflix DRM is analogous to the set-top box or cablecard required to decrypt and view Digital Cable signals in the US. Would you disapprove of someone like 'Lifetime' or 'History Channel' showing Sita Sings the Blues over a system that is DRM'd in that manner?

Netflix streams

I first joined Netflix because of the vast library - it included many rare titles that I really wanted to see. It was a film buff's dream come true. The only negative was the overwhelming desire to watch and return the discs as soon as possible. I felt like a junkie.

Then Netflix offered streaming movies, but only about 15% of the movies in my queue were available. Now it's over 50%, and I suspect in a few years it will be 100%. Streaming has taken away that junkie feeling - now it's just choosing the best movie to watch.

When Netflix offers a streaming only plan - most likely even cheaper than any plan they offer now - that's when big changes will start happening.

Needless to say I have no need for cable TV, buying DVDs, or going to the theatre (there's always something better to watch on Netflix). The money I save I spend on live theatre.

And Netflix's customer service rocks. More than any other media retailer, Netflix always seemed to put the customer first and never tried to screw you. Good luck getting me to change from that.

Netflix

You have to remember that Netflix saw that there was one ISP growing very fast and believe in net neutrality and could handle the bandwidth they needed for their movies. This was group they are for and were not caring about the other ISPs as this one had the number of customers and worked with them to get the bandwidth to the customers. So this was good business as they saw this ISP doing what they want and didn't care about the amount of bandwidth the people were using as most ISPs in the US. This where 80 to 90 percent of their bandwidth goes to and they don't care about the other ISPs as they have more then enough business from them. So they also spent the money to make the system with heavy demands of it. Even Google has trouble meeting the requirements of this ISP. So the bottom line they saw the growth of this ISP and they decide to work with them and this is also where people are cutting the cord for satellite and cable and going pure Internet.

Re: Re: Re: Re: Sigh

DRM doesn't just impact availability or compatability, it also impacts the quality of the service. This is quite an issue with Flash where something like Boxee can be a problem with the Linux or Mac version of the Flash plugin. Anyone that uses a proprietary technology is dependent on the owner of that technology to make timely and useful updates.

Adobe is 2 years behind the community in supporting video acceleration on Linux.

Netflix, Amazon, Zappos

Netflix, Amazon, Zappos (I'm sure there are more), put the customer before profits knowing that if they have a happy customer they will buy more and spend more. Sure, I've had issues with Netflix and Amazon, but when I spoke to them they issues were resolved. As a consumer, that's all I'm looking for. I am not the enemy.
Now looking at blockbusters legacy model. If you didn't rewind it... Bam! Fee. Turned it in late... Bam! Another fee. Their business model wasn't one of promoting customer satisfaction. It was built on fear. Knowing that a certain percentage of customers were going to accumulate some sort of fee.
Way to go Netflix. I'm glad your beating the big guys. I guess they're not so big now are they. Isn't blockbuster filing for bankruptcy?

Re: Netflix

Re: Re: Long-Term Challenges

"You can prove that now. iTunes has a much larger library of streaming content than Netflix, but more people get their video entertainment from Netflix."

Apple vs. Netflix is an "Apples to Oranges" comparison. One is an all-you-can-eat subscription and the other is paid VOD and download-to-own. They have very different usage, revenue and business models. So it's not a very useful comparison, at least until Apple starts offering subscriptions. Even then, Apple's goal will likely be to sell hardware.

Re: Re: Long-Term Challenges

Re: Re: Long-Term Challenges

A fair point; however, I believe the effort to help Blockbuster was pretty half-hearted.

"Avatar," for example, is not available to to watch instantly on Netflix. That's because Fox hasn't licensed it to them. If Fox and one or two other major studios decided that CompetitorX would get streaming rights for ALL their top-grossing films for a significant period before Netflix, then it's conceivable that CompetitorX could start taking subscribers away from Netflix.

For DVDs, Netflix could send people into Walmart to buy copies of Avatar if they had to. But for streaming, which requires licensing, they are at the mercy of the studios. And just a handful of major studios control the content that Netflix must have. Their fantastic customer service would be irrelevant if they didn't have the content their subscribers want.

To compete with Netflix's rent-by-mail, it would likely require tens of millions (or more) of capital investment to build regional distribution centers. For streaming, you can create the infrastructure (software & hardware) for less than $10 million.

I didn't say Netflix isn't great. In fact, I said they are. But in a world where Internet streaming dominates, they face the challenges of lower barriers to competition and much greater reliance on a small number of studios. Those studios would likely love to see Netflix get into a bloody bidding war for exclusive content with giants like Amazon, Apple and Google. That could get ugly for them. So, while I said my guess is that Netflix will pull it off, I also think analysts have a valid basis to worry about their future.